This isn’t the only mini-bond to fail, there have been others
– e.g. the Secured Energy Bonds, Jan 2016.

It is to the 22nd September article that Mr Bond is
returning; there were two statements, the first ‘…, if it isn’t listed it likely best avoided; period’, and the
second, ‘‘the ‘gold standard’ in Europe
for bond investors is the prospectus directive’.

For the sake of clarity all
bonds listed on the LSE fall under the Prospectus Directive (“PD”).

Whilst Mr Bond is happy to defend championing LSE listed
issues, he acknowledges the lack of supply, with only five new issues since the
beginning of 2016, whereas the bad old mini-bond market is churning them out
like cold-war spies seeking to lure him with their tantalising coupons.

All this set Mr Bond thinking; is there a third-way? One
where he can have the seductive wiles of the mini-bond but with some of the
benefits of the PD?

Before reading on there is some caveat emptor, whatever you
do the mini-bond will be unlisted, meaning that there is no on-going no liquidity and the investment must be held to
maturity.

We spoke to a firm that arranges listed bonds and discussed
other comparisons, liquidity aside, between listed and mini-bonds. The issuers
of mini-bonds tend to be ‘smaller’ businesses borrowing smaller amounts of
money; because of this, coupons should be higher, we would expect 7% possibly
8%.

One of the biggest problems is that the issuers tend be new
businesses with little or no accounting history. Whereas, under the PD the
issuer, or guarantor, is required to have two years audited accounts of ‘substance’.
Some mini-bond issuers have tried to overcome this by offering security,
however in many instances the assets representing the security are to be
purchased with the bond proceeds.

Furthermore, the assets will be income producing to service
the coupons. Whilst this sounds plausible, it rarely is; for example:

*Day 1; New Co issues an 8% bond and raises £5m,
in theory the security trustee hold £5m in cash as security, in practise the
issue costs are deducted from the proceeds at outset. if we assume this totals
£150,000 then the trustee is left holding only £4,850,000 (97% of the
proceeds).

*Six months after issue the first coupon of 4%
(half of 8%) is due. If the issuer hasn’t been able to invest in income
generating assets then they will likely use the cash security, diminishing this
by a further £200,000 to £4,650,000, or 93%.

*Meaning that in the event of a default there may
not be sufficient to repay bondholders

The next point is the invitation document used by mini-bond
issuers; these tend to be shorter than a PD compliant prospectus, 50 to 60
pages against 150 pages upwards. The invitation document is really a marketing
booklet, with little in the way of issuer or industry specific risks disclosed,
effectively a general lack of transparency and disclosure. In comparison, the
PD compliant document offers a high degree of both, and financial covenants
designed to protect investors by restricting how much an issuer can borrow, for
example:

*An interest rate cover covenant of 1.5: 1 and a
negative pledge whereby they cannot offer security to another lender (i.e. a bank)
and put them ahead of bondholders, or

*Financial indebtedness of the issuer does not
exceed [50%] of the sum of the Group’s total assets, or

*For so long as any Note or Coupon remains
outstanding, the Issuer shall ensure that, as at each Reference date, (i) the
Leverage ratio is less than 3.0: 1.0, and (ii) the ratio of EBITDA to Finance
Charges of the period of 12 months ending on such reference date is not less
than 4.0: 1. 0.

Mr Bond now realises that there might be a third-way,
essentially a mini-bond but one where the invitation document is based around
the PD providing investors with:

*the transparency and disclosure required

*with either actual security or 2-years plus
accounting history

*proper financial covenants

Mr Bond understands that there is an issue being created
that could address this, and stands ready to review it in future issues.
In conclusion, whilst mini-bonds will never be the true
equal of an LSE listed issue, the third-way could make them ‘the bond that came
in from the cold’!